The following is a translation of a speech given by long-time Sega president Hayao Nakayama on January 17th, 1994 on the occasion of Sega’s annual new year party. Such new year parties are common in Japan and are attended by employees from many different companies, and they serve as a way for companies to build business ties and for employees to exchange business cards. This particular party was held at the Hotel Okura in Tokyo and was attended by 1,150 people, including executives from different companies in the game industry. The transcript of this speech was published in Sega’s internal newsletter (Harmony, Feb/March 1994), which I was graciously allowed access to by a former employee.
Thank you all for joining me here today.
I’d like to begin with a review of 1993. I must unfortunately announce that Sega has suffered hardship this past year. However, as Sega is quite a tough company, I can also announce that we have achieved a great success.
The hardship that I mentioned is that Sega had to revise downward its expected performance. There were three reasons for this. The first reason was the worsening economic environment. In particular, the situation has become quite severe in Japan and Europe, and somewhat so in America. The second reason is the appreciation of the yen, which has caused revenue from exports to drop below the break-even point. The third reason, which I think is the biggest problem, is that the arcade and home consumer markets have entered the so-called off-season. This occurred just as Sega was approaching a leveling-off period in its performance.
At the same time, Sega has achieved a great success. I’ve just arrived back from the Consumer Electronics Show held in America. From the second half of 1992, Sega has been putting a lot of pressure on Nintendo in America, and this past year, in terms of revenue, Sega has achieved 55% to Nintendo’s 45%. This is in reference to each company’s entire business operations. If we just look at the retail market for 16-bit consoles, in the month of November, Sega accounted for 63% of console sales. In terms of game software sales, the top three titles were for Sega hardware, as were seven of the top ten. I’m sure those of you working in the home console industry find this quite different than the situation in Japan.
These numbers are not just coming directly from Sega. They are the results of TRSTS (Toy Retail Sales Tracking Service), which is an independent service that reports on actual retail sales in America. Because of that, these numbers can be viewed as quite accurate. It’s also likely that Sega’s sales have increased even more in December. I don’t think I would be going too far by saying that Sega has fully recovered in the American market.
Looking at our progress in overtaking Nintendo so far, I think it is possible this year in the 16-bit home console market that Sega can achieve a 70% market share to Nintendo’s 30% in America. In the handheld market, in terms of units sold, the Game Boy sold about twice as much as the Game Gear in 1993 due to its low price. However, in terms of revenue, the Game Gear is exceeding the Game Boy due to its higher per-unit cost. If we continue with this same momentum, I think there is little doubt that, in regards to overall business operations, we can reach between 60-40 and 70-30 against Nintendo.
We’ll soon be making the transition to the next generation of home consoles. Our upcoming 32-bit console will have a much different architecture than anything we’ve seen yet. Up until now, the focus has been on sprite-based graphics, but now we’re moving on to polygon-based graphics. The foundation of next-generation hardware will be support for CG-like graphics. Specifically, we’re using chips such as the VDP and DSP that are capable of very fast instruction processing. An important concept that has appeared recently is MIPS. This refers to how many millions of instructions can be processed in one second. The CPU in our 32-bit console is about 50 MIPS. However, we’re also including the VDP and DSP to increase the speed of calculations, which brings it up to about 800 MIPS. What that means is the console will be capable of performing 800 million instructions per second. Without a doubt, it’s going to be a very powerful console, and essentially a high-grade computer.
You might wonder why it’s necessary to build such a high-performance console. The reason is that the current types of games have reached their limit. The market did not grow very much from the 8-bit console generation to the 16-bit console generation. Why? 16-bit consoles were basically straightforward extensions of 8-bit consoles, and because of that, games did not evolve significantly. What, then, is necessary to create such new styles of games? The answer is polygon-based computer graphics.
Moving forward, we will be focusing on questions such as how far we can take polygon-based graphics, to what extent we can incorporate digitized video into creating new genres of games, and what age ranges, beyond the typical 8-20 year olds, we can reach with such new forms of entertainment.
Last October, I started to get some slight headaches with all the reports of major consumer electronics companies such as Matsushita and Sony entering the game console market. As president, I was already feeling a lot of pressure with Sega being forced to revise its expected results downward and with the worsening global economic situation, and on top of that, the 3DO was released before Christmas in America and Sony announced they were releasing their console at the same time as us. However, after going to America and learning more about the situation, I’m feeling more confident. One reason for that is the realization that Sega knows games better than any of them. Many people are saying that the 3DO isn’t selling well because its games are no good. However, I think there’s more to it than that. Specifically, a machine at that level of performance with a $700 price tag is just not competitive.
Next, I want to talk about our efforts in multimedia [ed: Nakayama’s use of the term ‘multimedia’ here is in relation to the ‘information superhighway,’ a hot topic at Sega in the mid-1990s]. It’s predicted that Japan will finally enter the multimedia era in 2010. That market is said to be worth $1 trillion or $1.5 trillion. When I say multimedia, you might wonder what I mean. Broadly speaking, it represents a change in peoples’ lifestyles. It’s not the case that multimedia will simply bring about never-before-seen things. Instead, it’s going to bring together different things into a unified whole. It’s going to bring together the world of telecommunications, the world of consumer television, the world of movies, the world of music. They’re all going to form a single whole. Surprisingly, multimedia will even support shopping from home.
Disney in America has recently made news for announcing that they will not be investing in multimedia. Last week on Monday, there was a multimedia symposium held in Los Angeles that was attended by Vice President Gore [ed: this was the first Superhighway Summit, held at UCLA]. Our own Tom Kalinske gave a speech there. At that time, Disney’s chairman Michael Eisner announced that Disney would not be investing in multimedia at present. This announcement received a lot of criticism, with many saying it was strange to stand by and do nothing when it is predicted that multimedia will bring about changes to not only the way we shop, but to how goods are distributed. Setting aside the matter of who is right or wrong, I want to emphasize the high hopes and expectations that many in America have for multimedia.
Of course, multimedia alone isn’t going to cause television to become more interesting or anything like that. At the least, though, it’s going to unify many different aspects of our lives and bring about a lifestyle change. It’s going to cause a seismic shift in how our society operates. Because of that, there are going to be many new businesses that appear, and also some that disappear. That’s why Sega has to be prepared to respond to this new era. America is the most advanced right now, but I expect Japan to catch up soon.
In regards to our amusement operations, Sega will be opening its first amusement theme park in July at Yamashita Park [Yokohama]. From the second half of 1994 and into 1995, we will be strengthening the core foundation of this business, so I don’t expect to announce any sudden, positive results yet. In particular, the Japanese economy is in a slump this year, so it’s hard to imagine that there are going to be any sudden changes in our favor. In the end, we have to rely on our own best efforts to improve our business. Therefore, I consider this year to be a year of preparation for next year.
There is also a large market asleep in the American arcade industry. As in Japan, I’m confident that upgraded arcades will create a good business chance for us there, and I’m not alone in this assessment. Quite a few companies have approached us about working together to take advantage of this chance and open up a new market. As for who we will work with, names such as MCA and Time Warner have come up, but more importantly, I think that whoever we work with, we will be able to create a new market for arcades in America.
The best way for Sega to grow is to not only release individual products, but to create new markets. If we can create a market and then take control of a large share of that market, then we will be able to greatly expand our business. Amusement theme parks and upgraded arcades represent such new markets, and we will continue to focus on them in order to bring about new business opportunities for Sega.